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MGM Holdings (MGMB) operates Metro-Goldwyn-Mayer Studios Inc. and is a major producer and distributor of movie and television filmed entertainment. Regarding movies (films), MGM states, “Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first made available for home video (online downloads) generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five years after theatrical release.” Assume that MGM produces a movie (film) during early 20Y5 at a cost of $340 million and releases it halfway through the year. During the last half of 20Y5, the movie earns revenues of $420 million at the box office. The movie requires $90 million of advertising during the release. One year later, by the end of 20Y6, the movie is expected to earn MGM net cash flows from online downloads of $60 million. By the end of 20Y7, the movie is expected to earn MGM $20 million from pay TV, and by the end of 20Y8, the movie is expected to earn $10 million from syndication. a. Determine the net present value of the film as of the beginning of 20Y5 if the desired rate of return is 20%. To simplify present value calculations, assume that all annual net cash flows occur at the end of each year. Use the present value table appearing in Exhibit 2 of this chapter. Round to the nearest whole million dollars. b. Under the assumptions provided here, is the film expected to be financially successful? Explain.

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 26, Problem 6TIF
Textbook Problem
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MGM Holdings (MGMB) operates Metro-Goldwyn-Mayer Studios Inc. and is a major producer and distributor of movie and television filmed entertainment. Regarding movies (films), MGM states, “Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first made available for home video (online downloads) generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five years after theatrical release.”

Assume that MGM produces a movie (film) during early 20Y5 at a cost of $340 million and releases it halfway through the year. During the last half of 20Y5, the movie earns revenues of $420 million at the box office. The movie requires $90 million of advertising during the release. One year later, by the end of 20Y6, the movie is expected to earn MGM net cash flows from online downloads of $60 million. By the end of 20Y7, the movie is expected to earn MGM $20 million from pay TV, and by the end of 20Y8, the movie is expected to earn $10 million from syndication.

  1. a. Determine the net present value of the film as of the beginning of 20Y5 if the desired rate of return is 20%. To simplify present value calculations, assume that all annual net cash flows occur at the end of each year. Use the present value table appearing in Exhibit 2 of this chapter. Round to the nearest whole million dollars.
  2. b. Chapter 26, Problem 6TIF, MGM Holdings (MGMB) operates Metro-Goldwyn-Mayer Studios Inc. and is a major producer and Under the assumptions provided here, is the film expected to be financially successful? Explain.

a.

To determine

Compute the net present value of the film.

Explanation of Solution

Net present value method: Net present value method is used to compare the initial cash outflow of the investment with the present value of its cash inflows. In the net present value, the interest rate is determined by the business based on the net income received from the investment. This is also called as the discounted cash flow method.

Calculate the net present value:

Net Present Value of Film
YearPresent Value of $1 at 20%Net Cash FlowPresent Value of Net Cash Flow
20Y50.833($10)($8)
20Y60.694$60 $42
20Y70.579$20 $12
20Y80.482$10 $5
Net present value of Film$51

Table (1)

Hence, the net present value of film is $51...

b.

To determine

Identify whether the film is financially successful.

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Chapter 26 Solutions

Financial And Managerial Accounting
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